Budgeting and Forecasting Part 1: The CEO’s role in the budgeting process

Posted on: October 27th, 2014

Backwards Budgeting. Begin with the End in Mind.

As a speaker and facilitator to CEO groups, I’m always baffled by the response I get when I ask CEO’s about budgeting and forecasting.  In a room full of well respected CEO’s, typically only 10% of them raise their hands that they have a budgeting process for their companies.  When asked why, they always give a version of the same responses: “It’s a laborious process and I don’t see value.  After all the time and effort into the budgeting process and then, 5 days into the new year, everything changes anyway. I feel like the budget is worthless”.

Here is the problem with that thinking: 

Most CEO’s believe that the actual process of creating the budget and forecast is the most important part of the equation.  Sure, the more detail and analysis you include, the more accurate you can be.   However, most CEO’s get trapped in the process, which is not where the most value lies. As the CEO, your job in the budgeting process is NOT to determine which forms, process, spreadsheets, or computer programs to use and then gather your team for endless and exhausting meetings together.  The greatest value in the budgeting exercise is through addressing these 5 critical questions.

  1. How much money do I (and the other owners) want to make next year?
  2. What do I intend to do with this company in 3-5 years? If you plan to sell the company then the next question is: 
    1. How much do I want my company to be worth in those 3-5 years?
  3. What capital expenditures or additional investments in my company do I want to make next year?
  4. Do I anticipate my overhead/fixed expenses to change dramatically next year? If so, why and by how much?
  5. What gross margin can I reasonably hope to achieve next year?

Most CEO’s begin the budgeting process backwards.  Starting with the revenue and spending hours dissecting customers, trends, and backlogs to try to try and determine next year’s projected revenue, will not address the aforementioned questions.  In fact, just the opposite. This process sets the owner up to take the leftovers.

CEO’s need a dramatic paradigm shift when creating budgets.  Start with the bottom line. By asking how much money the owners want to make, or how much they want their company to be worth in 3-5 years, allows the CEO to determine what their bottom line (or EBITDA, cash flow, net income) needs to be next year.  One this question has been answered, 90% of the most critical part of the budgeting process has been completed!